The state of the deal
M&A trends 2018

The state of the deal | M&A trends 2018

Executive summary

01

Deal characteristics

04

Strategic drivers

07

Deal success08

Headwinds and obstacles

10

Industry convergence

12

Looking abroad

14

Deal spending firepower

16

Conclusion

17

Meet the team18

About the survey

19

About this report
This report is the result of a survey of more than 1,000 executives
to gauge their expectations for M&A activity in 2018 and to better
understand their experience with prior transactions.
All survey participants work in either private or public companies
or private equity firms with annual revenues of $10 million or
greater. The participants consist of senior executives (director-levelor higher) involved in M&A activity. One-third of corporate
respondents work in the C-Suite, while half of private equity
respondents are involved in fund management.
For more detailed information about this report see:
About this survey (page 19)

The state of the deal | M&A trends 2018

Executive summary
Corporations and private equity firms
foresee an acceleration of merger andacquisition (M&A) activity in 2018—bothin the number of deals and the size of
those transactions.
In Deloitte’s fifth M&A trends report, we heard from more than 1,000
executives at corporations and private equity firms about the current
year and their expectations for the next 12 months. The results point
to strong deal activity ahead: About 68 percent of executives at USheadquartered corporations and 76 percent of leaders at domesticbased private equity firms say deal flow will increase in the next
12 months. Further, most respondents believe deal size will either
increase (63 percent) or stay the same (34 percent), compared withdeals brokered in 2017.
Since our previous annual survey, the environment for domestic
M&A has been muted due to concerns about, among other things,
the economy, political and regulatory uncertainty, market volatility,and valuations. While those concerns are all diminishing according
to findings from our new survey, 1 in 8 respondents cites delayed
legislation as a potential obstacle ahead. That concern could abate if
significant pro-business legislation, including tax reform, materializes
in the coming months.

1

The state of the deal | M&A trends 2018

Key findings

2

Tools andtechnology
are making an
impactAlmost two-thirds of respondents (63 percent)are going beyond the spreadsheet and using new
M&A technology tools to assist with reporting andintegration. Respondents say the tools help reduce
conflicts, costs, and time—likely key factors in making
more deals work.

In it for thetechnology

Technology acquisition is the new No. 1 driver of
M&A pursuits, ahead of expanding customer bases inexisting markets, or adding to products or services.
Talent acquisition continues to trend upward as amotivation for M&A strategies. In a new questionin this year’s survey, 12 percent of respondents cite
digital strategy as the driving force behind M&A deals
for the coming year; combined, acquiring technology
or a digital strategy accounted for about a third of alldeals being pursued.

Bigger firms
are moreconfident

Corporate executives and private equity investors
from the largest firms—with revenues andinvestments in excess of $1 billion—are considerably
more confident than their smaller counterparts thatthey will engage in bigger deals in the coming year.

Deals areworking better

Only a handful of corporate respondents (12 percent)say that a majority of their M&A deals are notgenerating the expected return on investment. Thisis down from just under 40 percent in spring 2016.
An even slimmer number of private equity survey
respondents (6 percent) say that a majority of theirdeals are missing the mark—this is consistent withwhat respondents reported a year ago and continues
the downward trend from a high of 54 percent back inspring 2016.

Full speed
ahead fordivestitures

Divestitures should persist as a major focus in 2018.
Seventy percent of survey respondents plan to shedbusinesses next year—driven by financing needs andstrategy shifts.

Driven by
convergence

Industry and sector convergence continue to be
major themes, with a strong bias toward vertical
integration. Top industries that respondents predicted
to experience convergence are life sciences and healthcare, technology, and financial services.

The state of the deal | M&A trends 2018

The survey is full of additional revealing insights. Corporations
have spending firepower; more companies say their cash levels haveincreased, and M&A remains the No. 1 intended use of those funds.
There also is a marked downtick in interest in global deals, with far
fewer US-based acquirers looking to Asia (China and Japan), Brazil,
Italy, and Spain for acquisitions. For these five countries alone, interest
among deal seekers is down an aggregate of 26 percentage points
compared to a year ago.
As you delve deeper into these findings, you will see what drives
entities to pursue deals, what’s considered critical to their success,and how new analytic tools are making a difference. Our objective
behind these reports remains to provide you with insight into the
M&A ecosystem so that your next transaction can be as successful
as possible.
Russell Thomson
National Managing Partner
Mergers & Acquisitions Services
Deloitte & Touche LLP

Deals are working better
For transactions your company has completed within the past 2 years, what percentage
has not generated their expected value or return on investment?
0% or none

6%
0%
51%

1%–25%

66%
19%
16%

26% - 50%
51%–75%6%
4%76%–100%

6%
2%

Don’t know/not sure

10%
12%

Corporate executives (n=766)

Private equity (n=250)
3

The state of the deal | M&A trends 2018

Deal characteristics
Size

VolumeType

Divestitures

Survey respondents remain generally optimistic that the numberof M&A deals will increase over the next 12 months. Sixty-eightpercent of corporate respondents and 76 percent of private equity
respondents anticipate an uptick in the number of transactions. This
year’s figures have edged down slightly compared to 2016, when 71
percent of corporate respondents and 86 percent of private equity
respondents projected an increase in the number of deals.
Roughly a quarter (26 percent) of corporate respondents and 20
percent of the private equity respondents expect deal flow to stay thesame as the prior year. Both the expectation of higher deal volumes
and larger deals is in sharp contrast to the trends seen over the pastfew months of 2017.

4

The state of the deal | M&A trends 2018

Size
63%

34%

Deal size
Expectations also are high for heftier deals: Sixty-three percent ofrespondents anticipate the average enterprise size of transactions in
the next 12 months will exceed those in the past year. Meanwhile, 34
percent of respondents expect that deal size will hold steady.

ExceedStaythe lastthe
12 months same

Deal volume
Respondents from larger organizations—both on the corporateside and the private equity side—anticipate doing more deals in thenext 12 months than they did in the past year. More than a third (35percent) of corporations with revenue in excess of $1 billion intend topick up the pace on acquisitions, compared with 22 percent of smaller
companies. At private equity firms investing more than $1 billion, 29
percent expect deal activity to step up significantly in the year ahead,compared with 12 percent among their smaller counterparts.
Corporate respondents acknowledge they were more selective instriking deals in the trailing 12 months. The number of companies
that closed six or more deals declined slightly (down to 52 percent
from 60 percent a year ago). The number of companies that closed
five or fewer deals increased slightly (up to 45 percent from 38
percent a year ago). The aggregate value of deals fell; respondents
closed fewer deals in the $500 million to $1 billion range and fewer
deals of more than $1 billion.

12%

22%

29%

35%

Volume>$1B<$1B

The findings mirror overall market results. While deal activity was
brisk for the first three quarters of 2017, companies were cautious
and focused on deals at the more modest end of the spectrum. The
number of domestic transactions rose 19 percent from the start of2017 through the end of September, compared to the same period
in 2016. The value of these transactions in the first three quartersof the year declined 15 percent to about $869 billion, according toThomson Reuters.1

Corporate
Private equity

5The state of the deal | M&A trends 2018

Strategic sale
Sale to another private equity

Technology acquisition
Digital strategy

19%
16%

26%

53%

Type

Corporate
Private equity

Divestitures
2018
70%
2016
48%

6

Deal type
Corporate respondents report diverse motivations for pursuingdeals. The most cited reasons were looking to acquire technology
and looking to build out a digital strategy (19 and 16 percent,respectively). Some plan to seek major, transformational deals(17 percent). Others say they are on the hunt for smaller, strategic
opportunities (15 percent).
On the private equity side, 60 percent of respondents expect agreater focus on bolt-on acquisitions to build scale in the next year.
More than half (53 percent) see strategic sales as the main driver of
portfolio exits. About 26 percent anticipate a sale to another private
equity firm and 19 percent expect to tap the public markets for an
initial public offering to exit a position.

Divestitures
Divestitures are on track to remain in vogue in 2018. Some 70 percent
of both corporate and private equity respondents say they plan to sellunits or assets in 2018, up from 48 percent in the spring of 2016.
On the corporate side, survey respondents cite a change in strategy
as their top reason to divest businesses. Corporations with revenue
over $1 billion expect an unsolicited bid for one of their non-corebusiness units, by more than a two-to-one margin, as compared tosmaller companies.

The state of the deal | M&A trends 2018

Strategic drivers
20%

19%

16%

12%

9%

Technology
acquisition

Expandingcustomer basein existing
markets

Expand/diversify
products orservices

Digitalstrategy

Talentacquisition

Acquiring technology assets now ranks number one asa strategic driver of M&A deals. Twenty percent cite theacquisition of technology assets as the principal reason behinddeals, up from 6 percent in the spring of 2016.
Expanding customer bases in existing markets, and adding to
product offerings or diversifying services, rank as the next two
strategic imperatives.
Two other notable drivers that corporate respondents cite as arationale behind dealmaking are:1.		Digital strategy, a new response option for what is driving deals,
ranked number four in importance, with 12 percent citing it as
the most important driver.
2.	Talent acquisition has more than doubled in importance fromthe spring of 2016, growing from 4 to 9 percent.
What’s less important? There continues to be less emphasis on
obtaining bargain-priced assets, with only 6 percent of respondents
citing this as the most important driver. Entry into new geographic
markets remained the same at 11 percent.
7

The state of the deal | M&A trends 2018

Deal successand the emergence of new diagnostic tools

Decrease in
those who say amajority of
their deals havenot generated
expected value
or return on
investment
54%

40%

12%
6%
2016

2017

Corporate
Private equity

8

Companies and private equity firms appear to be getting
better at achieving their goals for their deals. There continues
to be a decrease in respondents who say that a majorityof their deals fall short of expectations. Overall, only 1 in
10 respondents say that more than half their deals did notdeliver the return on investment they had anticipated.
That is unchanged from the 10 percent level a year ago, but
significantly down from the 40 percent who said more thanhalf their deals did not deliver back in our spring 2016 survey.
Among corporate respondents, 12 percent said that more thanhalf their deals did not meet expectations, down from 40 percent
back in the spring 2016 survey. For private equity respondents, only
6 percent said deals didn’t deliver as anticipated, down from 54
percent last spring.
A similar proportion (11 percent) of respondents say they are
not sure their deals are meeting or exceeding expectations.
And it is important to note that more than half (55 percent) of
all respondents say that up to a quarter of all deals fall short ofmeeting or exceeding expectations.

The state of the deal | M&A trends 2018

Our surveys consistently show that wellplanned, carefully-executed integrations
yield transaction success.

Non-spreadsheet M&A
technology
tools are partof the deal

37%

63%

Use M&A
technology
tools
Do notuse M&A
technology
tools

More than 6 in 10 respondents (63 percent) say they now
incorporate the use of non-spreadsheet-based M&A technology
tools as part of their deal processes. The respondents cite a raft ofbenefits. These analytical tools make post-deal integration smootherand faster, reduce costs and conflict, and shorten the time it takes tocomplete them.
Those who have not used M&A technology tools yet would like to
do so going forward: Sixty-two percent of those who still rely on
spreadsheets want to tap into these new M&A tools to integrate
their acquisitions faster and more smoothly and to reduce costs
and conflicts.
For the second straight year, respondents cited effective
integration, accurate valuation, and economic certainty
as the three most important factors for a deal’s success.
A stable regulatory environment climbed into a tie forfourth place with proper target identification.
Change management, the quality and timeliness of data, andcapturing synergies have persisted as top concerns upon striking adeal. This year, respondents cited the speed of decision making andadded aligning cultures as key areas of concern.
Our surveys consistently show that well-planned, carefully-executed
integrations yield transaction success.

9The state of the deal | M&A trends 2018

Headwinds
and obstacles
Globaleconomic
uncertainty

Marketvolatility

Dealvaluation

Interest rate
concerns

In our prior report—completed in fall 2016—global economic
uncertainty, capital market volatility, deal valuations, and interest
rates ranked sequentially as the leading obstacles to M&A activity
by corporate and private equity respondents combined.
All four of these categories were cited by fewer respondents in
our current survey, demonstrating diminishing worries about
these topics.

10

The state of the deal | M&A trends 2018

Globaleconomic
uncertainty

20%
6%

Capital market
volatility

17%

4%

Deal valuations

15%
1%

Potential
delays in key
business-related
legislation

13%•• Global economic uncertainty still tops the list of potential deal
obstacles over the next 12 months, though only 20 percent
cite it as a concern, down from 26 percent in our fall 2016
report. This perhaps demonstrates the increased resiliency
of companies and private equity firms to navigate throughmajor global economic shifts.
•• Capital market volatility was cited by 17 percent of respondents
in this year’s survey, down from 21 percent a year ago. This aligns
with recent developments in financial markets, where the CBOE
Volatility Index recently traded at its lowest historic level, amid
relative economic calm.2•• Deal valuations ticked down nominally as a leading obstacle,
cited by 15 percent of respondents compared to 16 percent a
year ago. Expectations around deal multiples have remained
relatively steady, as 41 percent (up from 40 percent a year ago) of
respondents believe price multiples will rise for both private andpublic deals in the year ahead.
•• Interest rate concerns dropped the most precipitously, down to 11
percent from 17 percent. That decline might be tied to the fact thattoday’s rates—despite a series of hikes by the Federal Reserve thisyear—are still quite low from a historical perspective.3

6%

While macroeconomic concerns have softened, our current survey
highlights apprehensions about the potential for delays in key
business-related legislation; 13 percent of corporate respondents and11 percent of private equity respondents cite the delays as a concern.
This may reflect challenges that Washington policymakers have facedwith passing key business-related legislation.4

11

The state of the deal | M&A trends 2018

Industry convergence
As revealed in previous M&A trends reports, survey
respondents continue to have high expectations for industry
convergence in the year ahead—though mainly in related
businesses or vertical integration.
There were some areas with increasing expectations for convergence,such as those between construction and energy companies and thosebetween energy concerns and manufacturers. Respondents also
anticipate more deals among retailers and technology companies.
Financial services, in aggregate, ranks high as an industry likely toexperience convergence, with 38 percent of respondents predicting
the sectors of private equity, asset management, insurance, realestate, and banking and securities as likely to converge. Life sciences
and health care also rank high.
None of these industries emerge as surprising choices. Changes in
the financial services industry are driven by the costs of technology
and compliance. Another factor is margin pressure as a result of
reduced fees on professional services. The situation is similar withhealth care, where consolidation is also being driven by pricing
pressure, in some cases tied to regulatory changes.
Among the highest expectations for sector convergence aresome that continue an ongoing move toward consolidation
within their industries. These include health care plans andhealth care providers and technology companies merging with
telecommunications providers.

12The state of the deal | M&A trends 2018

Which industries are converging
Energy andconstruction

Construction andmanufacturing

Retail andtechnology

Health careproviders and plans

Telecommunications
and technology

13

The state of the deal | M&A trends 2018

Looking abroad
A year ago, US-based investors were looking abroadfor deals in a diverse set of markets. While enthusiasm
remains high this year, the areas of geographic interest
appear to be shifting.

2017
2016

2017
2016

CentralAmerica

Australia

19%

24%

29%

32%

Increased
investment
in Central
America andAustralia

Private equity

14

More than 90 percent of respondents say they’ll continue to engage
in deal activity across borders. But dealmakers indicate they will be
more selective going forward. In our most recent survey, 34 percent
of respondents say they expect one-fifth or less of their deals to beinternationally focused. That’s up from 26 percent of respondents
from a year ago.
What’s driving this? Enthusiasm appears consistent with regard to
Canada (39 percent) and the United Kingdom (29 percent), as those
English-speaking countries continue to top the list of foreign targets
for private equity respondents and corporates combined. Private
equity respondents, however, ranked Central America (32 percent)and Australia (29 percent) as their next two targets. Interest in Central
America saw a sizable jump from a year ago, when 19 percent ofprivate equity respondents selected the region as a foreign target.
There is, however, a sharp decline in those looking to China andJapan. Only 18 percent of all respondents said they would pursue
deals in China, down from 25 percent a year ago. This year, 20
percent of corporate respondents and a mere 10 percent of private
equity respondents say they will look to China. Only 14 percent of all
respondents say they will look to Japan, down from 24 percent in lastyear’s survey.
Respondents said that Europe, as a whole, is less likely to draw
investment interest in the year ahead, despite consistent interestin the United Kingdom and France. Interest in investing in Germany
declined marginally and there were sharp declines in those targetingcompanies in Italy and Spain.

The state of the deal | M&A trends 2018

Which foreign markets are
you most likely to pursue?

United Kingdom

Canada

1

39%

1

39%

2

31%

5

26%
Europe(excluding UK, Germany,
France, Italy, Spain)

3
4

China

22%

5

28%

20%

4

20%

Mexico32%

2Central America
29%

3Austrialia
Corporate executives (n=766)

Private equity (n=250)

For corporate respondents with revenues over $1 billion, about
half (49 percent) are pursuing more than 40 percent of their deals
primarily in foreign markets. That compares to one-third (34 percent)of smaller corporate respondents whose targets operate principallyin foreign markets. There is a similar spread among private equity
respondents. While 43 percent of firms with at least $1 billion in
investments are involved in foreign deals for more than 40 percentof their transactions, only 32 percent of smaller entities are looking
abroad for the same proportion of deals.
15

The state of the deal | M&A trends 2018

Deal spending
firepower
Over the past two years, 65 percent of corporate respondents
said their cash reserves have increased (up from 58 percent),
and the primary intended use of that cash is for M&A deals.
In our spring 2016 report, respondents ranked organic investments
as the most likely use of their cash reserves. That’s no longer thecase. Predominately, companies now say they are seeking M&A
opportunities, with 40 percent citing that as their number one
intention. This is consistent with responses from last year. The
number of respondents saying they plan to earmark the cash toinvest organically in their businesses also remains high, with 33
percent of respondents citing that as a primary intended use—up from 30 percent a year ago. Markedly fewer respondents(14 percent) expect to use their cash to buy back stock.
Not only are companies more flush with cash and eager to use it tostrike deals, but many also realize that they have additional financing
firepower in stocks and bonds. Stocks remain at high levels, whileinterest rates are only modestly above their historical lows.5

16

The state of the deal | M&A trends 2018

Conclusion
Companies are sending strong
signals that they intend to aim
for bigger M&A targets in 2018;
sizable majorities of corporate
respondents and private equity
investors anticipate brisker
activity over the next 12months. If the legislativeenvironment yields substantive
changes, that could also lead to
additional deal activity.
This could help get the M&A
train back on track—both interms of deal volume andaggregate deal size.
Corporations did maintain theirappetite for deals in 2017, as
the overall volume oftransactions increased, though
the aggregate value of deals
was smaller.
Looking ahead, it appears that
corporate respondents are
narrowing the geographic fieldof potential targets as
significantly fewer are looking
abroad for deals. In anotherindication of mixed signals,

cash reserves are up forthe second year in a row
for two-thirds of corporate
respondents. Corporations
say that the primary intended
use of their cash reserves isfor M&A deals.
Acquiring technology assets
now ranks number one as a
strategic driver of M&A deals,
and is also a major factor forindustry convergence activity.
The dealmaking process will
look dramatically different as
innovations in diagnostic tools
continue to develop. The
introduction of new technology
for M&A transactions has
moved deals out of the
spreadsheet age both forcompanies that have adopted
the tools and those that areconsidering using them. Thesedevelopments comprise justsome of the many indicatorsthat M&A transactions have
evolved in meaningful ways.

17

The state of the deal | M&A trends 2018

Meet the teamRussell Thomson
National Managing Partner
Deloitte & Touche LLP
rthomson@deloitte.com

Susan Dettmar
Principal
Deloitte Consulting LLP
sdettmar@deloitte.com

Mark Garay
Managing Director
Deloitte Services LP
mgaray@deloitte.com

Follow us on Twitter @DeloitteMnA
Access the full report: www.deloitte.com/us/ma-trends-report
Subscribe to receive M&A thought leadership:
www.deloitte.com/us/masubscribe
18

The state of the deal | M&A trends 2018

About the survey
Between September 6, 2017, and September 24, 2017, a Deloitte
survey conducted by OnResearch, a market research firm, polled
1,016 executives—766 at US-headquartered corporations and 250 atdomestic-based private equity firms—to gauge their expectations for
M&A activity in the upcoming 12 months as well as their experience
with recent transactions.
All survey participants work either in private or public companies or
private equity firms with annual revenues of at least $10 million. The
participants hold senior ranks at least as a director in the firm and all
are involved in M&A activity.
The corporate respondents represent 18 industries; technology,
construction, professional services, banking and securities, andindustrial and consumer products account for about half the total
in aggregate. Most of the corporate respondents (57 percent) workin private concerns. One-third of the respondents work at a company
with more than $10 billion in revenue, and an equal number work in
a company with revenue less than $250 million, with the rest in
the middle.
The private equity respondents come from a variety of funds. Almost
4 in 10 (38 percent) of the respondents work at funds with more than
$1 billion in assets, and 1 in 6 (18 percent) work with funds of $3 billion
and up. Almost half (46 percent) of the private equity firms have 20 ormore in their portfolio; 22 percent have more than 40.

19

The state of the deal | M&A trends 2018

Endnotes
1.

Thomson Reuters data through September 30, 20172.

Michael Wursthorn and Riva Gold, “Stocks Extend Run of Record Highs; VIX at New Low,” The WallStreet Journal, October 5, 2017, https://www.wsj.com/article_email/asia-markets-mostly-higher-japanstocks-lack-direction-1507171181-lMyQjAxMTE3ODA5NjgwNDY3Wj/.

3.

US Department of the Treasury, ”Historical Treasury Rates,” https://www.treasury.gov/resourcecenter/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx,
accessed September 30, 2017.

4.

Peter Nicholas, Rebecca Ballhaus and Siobhan Hughes, “Frustration with Republicans Drove Donald
Trump to Deal With Democrats,” The Wall Street Journal, September 15, 2017, https://www.wsj.com/
articles/frustration-with-republicans-drove-donald-trump-to-deal-with-democrats-1505517354.

5.

Organisation for Economic Co-operation and Development, “OECD Data Long-term interest rates,”
https://data.oecd.org/interest/long-term-interest-rates.htm, accessed September 30, 2017.

20

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